Friday, May 3, 2013

True, Merck Is Not Apple -- But Let Us Look At Moody's Thinking -- With Some Comparative Rigor, This Time

I won't over-sell the analogy here, but it does hold up very well, in the particulars of this financial discussion.

First, it is true that Merck has just announced a large stock buyback program (up to $15 billion worth -- no expiration date). Apple has too. Apple's program is proportionately larger, relative to its market cap, but Apple, too will (in part) borrow money, to fund the stock repurchases. [It is also true that both companies are very low-leverage -- and big cash-generating cows -- proportionatley speaking.]

Yes -- both Apple and Merck are sitting on very large cash hoards -- outside the United States. In Merck's case, 80 per cent to 90 per cent of its 2012 year end $23.4 billion cash and short term investments, or around $21 billion, is held overseas (per page 69 of Merck's SEC Form 10-K). Each company would face punishing federal income tax liabilities, if either repatriated the cash, to use for stock repurchase activities, directly (Apple's tax bite was just estimated at $9.2 billion, should it do so -- see link below). Both are A-grade credits, at present.

Now -- enter Moody's -- and this is where these two would-be friends' "paths through the woods" -- now diverge. [BTW, Mr. Frost's immortal turn of phrase isn't apt, in this case, as these supposedly-differing paths here -- are really not different, at all. It is just Moody's lack of sophistication, in pharma-finance.]

Hilariously, Moody's analysts were just quoted saying that borrowing a good chunk of the funds ($17 billion overall) to use for repurchase of stock is a "no-brainer" -- because it allows Apple to avoid $9.2 billion in federal tax liability. Apple will use the foreign cash to pay down the debt -- and thus consume it, without repatriating it.

From AppleInsider, then:
. . . .But with Apple's $145 billion in cash, some were surprised that the Cupertino, Calif., company opted to borrow. This week, it sold $17 billion in debt in Apple's first bond offering since 1996. It was a dollar amount record for a U.S. corporate offering.

For its part, Apple has noted that it paid $6 billion in federal corporate income taxes in fiscal 2012. Spokesman Steve Dowling noted that Apple is one of the largest, if not the largest, corporate income taxpayers in the country.

Apple Chief Financial Officer Peter Oppenheimer also laid out some of the benefits to his company in tapping the U.S. debt markets. Speaking during Apple's quarterly earnings conference call last week, he said incorporating debt into the capital structure would offer access to attractively priced capital, would reduce Apple's overall cost of capital, and would be an efficient use of the company's balance sheet. . . .

Note, again, Merck is sitting on about $21 billion in foreign cash. Its entire repurchase program will max out at $15 billion. Let me reiterate that: Merck has $21 billion in cash -- it is just not in a convenient jursidiction's bank account, at the moment.

Merck would, just like Apple, pay a punishing tax rate, were it to repatriate the entire $15 billion directly -- to buy back the stock. That's roughly a potential $6 billion tax hit, avoided. Merck needs to soak up that foreign cash, in a tax-effective manner, no matter what else it does. Add to this that Merck wants to be shareholder-friendly, and run a large stock buyback. It's a perfectly natural match of good goals, and excellent tax planning.

But Moody's pharma analysts are apparently "the children of a lesser god" -- intellectually speaking -- when compared to their tech compatriots.

That is to say, the tech analysts at Moody's have applauded Apple's borrowing to fund repurchases (and spend down foreign cash hoards). . . while the pharma analysts at Moody's are wringing their hands, and clutching their pearls, nervously, over the very same actions -- at Merck.

HILARIOUS! Do stay tuned. I wonder if Moody's will clarify its "analysis."

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